In this paper we study how credit shocks, that is, shocks affecting the ability to raise external funds for borrowers, affect macroeconomic fluctuations. A positive credit shock leads to a typical macroeconomic boom, with an expansion in consumption, investment, labor, output and productivity....

analysis shows that innovations that have allowed firms to issue equity more flexibly can plausibly account for the lower output volatility together with the higher volatility in the financial structure of firms.